Tag Archives: Irs Form 8801

IRS Form 8801: Credit for Paying the AMT

Sometime you can get credit on your federal income tax return for having paid the AMT in previous years.  If you paid AMT in the past, and if you paid it for a certain reason explained below, you may be eligible to use IRS form 8801 to get an AMT credit.

How Do I Know if I’m Eligible to Use IRS Form 8801 for the AMT Credit?

There are two considerations:

  1. Did you pay the AMT in a previous year?
  2. What kind of AMT did you pay?

 

Well of course it’s easy to tell whether you’ve paid the AMT in previous years.  As for the second consideration, that’s way more complicated.  But don’t worry: I’m here to help with that!

The basic gist of the AMT credit is to find out how much of the AMT you paid in the past was because of things that had to do with timing.  These things are called deferral items.  If you look at IRS form 6251, lines 15 to 27 are deferral items.  So, if you look at your form 6251 from prior years’ tax return and you have entries in lines 15 to 27 then you may be eligible to use IRS form 8801 to get credit for those entries.

These deferral items are credited because there might be a difference in timing between the AMT system and the regular tax system.  Depreciation methods for the AMT system might be slower, so you got less credit on your AMT tax return for less depreciation.  Therefore, you can get a credit on IRS form 8801.

Using your AMT Credit To Reduce Your Regular Tax Bill

You can also carry over unused AMT credit from previous years.  If your regular tax comes out to be less than the AMT amount then of course you have to use the higher of the two systems.  However, you can use prior year credit to reduce your regular tax if that’s the system you have to use.  Here’s an example.

  1. Your 2012 AMT credit is $4,000
  2. You do your 2013 taxes.  Under the regular tax system you owe $10,000.  Under the AMT you owe $8000.  Therefore you would have to use the regular tax since it’s higher than the AMT.
  3. You can use your 2012 AMT credit to reduce your tax bill, but not the full amount.  You can use it to reduce your regular tax down to the amount the AMT would have been.  So for tax year 2013 you can use $2,000 of your 2012 AMT credit.
  4. Use IRS form 8801 to get your AMT credit.

Using IRS Form 8801 When You Have Exercised an Incentive Stock Option

Fill out IRS form 8801 every year if you have exercised an incentive stock option, until you have used up the AMT credit.  Under the AMT, you are taxed on profit you might make in the future.  Even if you don’t sell your stock options, you have to report under the AMT the fair market value of the stocks.  Incentive Stock Options (ISOs) allow you to get stocks at a nice low price, below fair market value.  Under the regular tax system the value of the options you bought is the actual price you paid.  That’s your cost basis.  However, under the AMT, your cost basis is fair market value of the stocks…way more!

If the AMT Rate Kills You One Year, Hope Exists in a Credit Next Year

The Alternative Minimum Tax is not something anyone wants to fall victim to, but at least the rate cannot go as high as the regular tax.  When figuring your tax, the rate under the AMT system may turn out to be lower than your regular rate, so even though you will have to remove some of your nice deductions from your taxable income, you’ll be using a rate of 26% or 28%, depending on the amount of your taxable income under the AMT rules.  Regular rates for income taxes range from 10% to 39.6%.

Which Alternative Minimum Tax Rate Do I Use?

If your taxable income is less than $175,000 then your Alternative Minimum Tax Rate is 26%.  If it’s over that, the rate is 28%.  For the super rich, the AMT may end up totaling less money than the regular tax because the Alternative Minimum Tax Rate is so much lower than what regular income tax rates can be:  almost 40% for the top income tax brackets!

If You Get Caught in the AMT Web…

Let’s say you figure your taxes and it turns out you end up having to pay the Alternative Minimum Tax.  Well nothing you can do about it.  You can’t give back your high salary, change the law, or avoid paying.  But there is one light at the end of the tunnel, hope for the future let’s say… it’s the Minimum Tax Credit (MTC).

If in future tax years you don’t have to pay the Alternative Minimum Tax rate, then you can apply the Minimum Tax Credit.  The amount you paid in AMT over the regular tax system can be applied as a tax credit in following years.  That’s only if you’re not subject to the Alternative Minimum Tax rate for the year you’re using the MTC.

The form you use for the Minimum Tax Credit is IRS form 8801.  It’s available for download in PDF format at the IRS website here.  It’s called Credit for Prior Year Mnimum Tax- Individuals, Estates, Trusts.

If you use IRS form 8801 you cannot use form 1040 EZ to file your income tax return.  You can’t use form 1040A either.  You must use the full 1040 form.

Just Another Reason Why Using Tax Software is Best

If you were subject to the AMT, your income is probably complex enough that using tax preparation software is going to be extremely beneficial to you.  Commercial tax software (or their online versions) like TurboTax or TaxAct can help guide you through the awful maze of IRS forms and tricky concepts like the Alternative Minimum Tax rate.  You simply answer questions and the software does the rest for you.